Italy Sees Borrowing Costs Fall

Tuesday

The auction of 10-year bonds was the first since the European Central Bank intervened to help push down rates.

LONDON — Despite a backdrop of weakening growth in the euro zone, Italy was able to sell a slice of debt Tuesday at a lower interest rate than at the previous auction.

But Rome’s financial position remained precarious and traders said it would require continued support from the European Central Bank to avoid seeing its financing costs rise again.

The auction of 10-year bonds was the first since the E.C.B. started buying Italian and Spanish debt in the secondary market three weeks ago — an extraordinary measure begun after their borrowing costs soared to 6 percent.

On Tuesday, the Italian Treasury sold €3.75 billion, or $5.4 billion, of 10-year securities priced to yield 5.22 percent. That compared with a rate of 5.77 percent at a sale of similar bonds in late July.

Demand at the auction was 1.27 times the amount offered, down from the level at the last auction of 1.38 times. The Treasury also sold €2.99 billion of notes maturing in 2014.

“Italy is still able to fund itself at ‘market rates’ but those are being artificially depressed by the E.C.B.’s bond buying,” said Eric Wand, an interest rate strategist at Lloyds Bank Corporate Markets in London.

He said that there had been speculation among traders that the E.C.B. had bought Italian bonds in the market after the auction. “If the E.C.B. was not around, the situation would be a lot worse,” Mr. Wand said.

The E.C.B. is not permitted under European treaties to buy bonds directly from governments, meaning it can only provide secondary-market support.

The yield on the country’s benchmark 10-year bond was stable around the auction at about 5.13 percent. It has dropped more than one percentage point since the E.C.B. began buying Italian and Spanish debt on Aug. 8, and slipped to 5.11 percent by midafternoon, after the auction.

Italy had €1.6 trillion of debt at the end of last year, according to its debt management office, making it Europe’s biggest national bond market.

Seeking to address concerns about its fiscal position, Prime Minister Silvio Berlusconi and other senior officials met Monday to amend a recently drawn-up fiscal package designed to net €45.5 billion in savings. Among the changes being discussed were proposals to drop a tax on the high earners and limit funding cuts to regional governments, Bloomberg News reported from Rome.

The lower chamber of Parliament will start debating the program next week and it is expected to be voted on by mid-October.

Euro zone governments are working on ratifying changes aimed at bolstering the region’s primary bailout system, known as the European Financial Stability Mechanism. But analysts said that will take time and in the interim, countries like Italy and Spain will continue to need support from the E.C.B.

Last week, the bank bought €6.651 billion in euro zone bonds, and that figure is expected by analysts to rise this week.

Spain is planning a sale of five-year securities on Thursday.

While the Italian bond auction appeared tepid, there was also more evidence Tuesday that the European economy is slowing amid the escalation in the sovereign debt crisis and recent turmoil in financial markets.

The European Commission’s economic sentiment index for the euro area fell to 98.3 in August from a revised 103.0 in July. The reading was lower than analysts’ estimates of 100.5 and was the lowest level since February 2010.

The weakening in sentiment in August was across the board, with both industry and services confidence shedding around 4 percentage points, while consumer confidence was down more than five percentage points.

“All in all the current level of the economic sentiment indicator, if confirmed in September, probably indicates that the recovery in the euro zone has come to a standstill,” said Peter Vanden Houte, an analyst at ING. “A small negative growth figure in the third quarter seems no longer excluded.”

Bucking the general trend, however, Italian business confidence unexpectedly rose in August as manufacturers become more optimistic about demand for their goods, another report showed.

Over all, the recent data on the economy and growth are adding to expectations that the inflation rate in the euro area may have peaked.

Jean-Claude Trichet, the E.C.B.’s president, told a committee of the European Parliament on Monday that the economic recovery might be weaker than expected, suggesting the bank might lower its growth and inflation assessments.

Preliminary inflation figures for August from Germany and Spain have both been below market expectations. Euro-area data will be released Wednesday.

Stock markets were mixed Tuesday. The FTSE 100 had climbed 1.9 percent by midafternoon in London, after a public holiday in Britain Monday. But other European indexes declined. The Standard & Poor’s 500-stock index was down 0.2 percent in early trading on Wall Street.

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